Market Briefing For Tuesday, July 5

Expectations of more fireworks following a 'more than classic, and far more than merely emotional' week just past, has really enlivened the bullish pundits a lot more than usual. In fact, with media trotting out the Street's rosiest outlooks (itself not unusual when a sell-off occurs and recovers entirely); one has to allow efforts to extend further, but beware the sensitivities as well as fundamental risk. And consider persisting hedge and mutual fund performance dilemmas based on a lot of macroeconomic factors and the realities of shareholder return efforts.
 

The former (sensitivities) refer to event risk over the weekend; hence a choice to retain a partial (light bet) on the short-side from Sept. S&P 2100 (yes, as we did that Friday morning I mentioned skepticism it could reverse; but turned out to be easy as the S&P was circling that exact 2100 futures level for about a half-hour). By mid-afternoon it had a 10-handle (large) short-side gain, so the normal idea was to protect some (typically half) that; and keep a bit 'just in case' over the weekend.

This was not so much because of knowing that the FBI would interview Hillary Saturday morning (and they did for about 3.5 hours); or the implications of the latest barbaric attack which took the lives of not only foreign diplomatic staff, but a few students from Emory University and another from Univ. Calif. Berkeley as a result of the ISIS assault on a Bangladesh restaurant, but some concern that the 'controllers' of markets had a profound influence on markets both ways (yes we projected both moves down and then up; while the point relates to velocity).
 

The second concern relates to fundamentals, where aside bets on some versus none (yield) in the U.S., pulling funds over here, there is no real underpinning to this market. Pundits poke fun at the persistent redemption's ongoing for weeks, but fail to ask what holds the market up then. And the answer (aside covering by shorts whenever a move gets going) is the returning rationale of 'yield chasing'.

And again here too, there are interpretations that are troubling: one is that elitist money managers and political establishments (here and abroad) 'know better' than the common sense of citizens, and also that they 'presume' their abilities to bring 'all' market declines back up intact. We thought this one would come back but because of how I've explained it relative to panic, psychology, and Quarter's end pension reallocation following-onto the requisite snap-back.
 

The point is at minimum a reminder than in a fundamental vacuum (as far as corporate profits or signs of substantive growth) central bankers and permabull money managers and analysts already are high-fiving themselves about their abilities to 'tame' and sort of bust, and keep the financial asset boom alive. Most won't consider the reality; this market's overall distribution persisted over nearly two years; while money shifted out of classic growth and innovation, primarily to dividend plays (we agreed with that, say when one talks of telecom or domestic-centric stocks, but warning it's a 'circling of the wagons', not a sign of optimism, while the return or dividends have been fine, so long as things are in a 'range').

Back in 2007 and 2008, recall even months after we (among a few) exposed the Fed allowing the institutions to shore up net-capital at their brokerage arms, the market ignored the (in our view evident) derivatives crisis, and rebounded quite a bit in what also looked like a cavalier disregard of the implied looming issues. This really isn't entirely different. Aside not purely based on derivatives, it is now an era of historic debt (far more so than in the prior decade when at least people were making money until the house of cards imploded.. literally housing).

Interpretation: the policies that are being pursued imply control. Bragging rights can be claimed by some like Germany's Schaeuble who has said the G7 agreed to deter a market crash, and they did just that (and we thought it would recover).

This capacity however, feeds hubris as they believe 'taming' market reversals is infinite, rather than a finite capability; as seen even before 'Lehman's moment' arrived in 2008. What they have done is put into motion a longer range 'process' that slowly but regularly decimates certain stocks under cover of a stronger DJ or S&P or EuroStoxx Index. Need I mention Deutsche Bank (DB) to Herr Schaeuble?

This morning I listened to reflections on Brexit by some technology guys; both in the business and venture capitalists, and players from countries like India. Well surprise; most see Brexit as an ultimate plus for Great Britain; and relish what's seen not as an impediment, but as an opportunity, to expand into the UK, for at least the Commonwealth members. Several also suggest that a housing bust for the first time in years would allow their technical folks and engineers affordability to be in London itself, instead of setting up shop elsewhere. Furthermore almost all are excited, not deterred; remarking how much more normal making deals in the UK is than trying to work with myriad complexities of dealing with the EU.

It seems to contradict almost everything (meaningful) that the 'Remain' crowd had said, and offers more (not less) opportunity for 'talented' international staff. This morning at my health club, I ran into four British students who actually agreed; two of the four were from India and Australia, and don't see this interfering with their prospects; and that includes working with foreign or Continent--based firms. Of course they're all studying aeronautical engineering or astrophysics; thus by no means looking for subsidies and handouts without contributing to society.

(It's apparent that Britain wants something like Australia's point system when it gets down to immigration issues; with an emphasis, as it should be everywhere, on legal immigration not rubber-stamped refugee status.. as the Russian leader of the terrorist attack on Istanbul had, by seeking refugee status in Austria; that's how he got to Turkey undetected while living and preparing ISIS brutality).  

Summary of chaos: Most debates fail to contemplate that what happened this past week, in a nutshell (it was nuts coming out of their shells too), was set-up really well in the prior week, with a parabolic rise ahead of the Brexit vote. Then, we rightly thought, with 'Remain' priced-in (discounted), it could easily be 'buy the rumor/ sell the news', or simply plunge. If the vote was for 'Leave' (as was our bias for how it would go; more so because of Britain's consistent difficulties with the EU moves to compromise sovereignty, not so much other aspects); we thought it would be straight down, with a turn by midweek. However, we called for it to turn back up after, regardless. Why? Not because Brexit had nothing to do with it; Brexit was a short-term inflection ('Swan'); on top of a mini-parabola.

As I outline again briefly (to new members) we had excessive scaremongering from George Soros and others; even after the first 'hit'; and we were suspicious they just might be playing it both ways (we did initially with a rare 'straddle'; albeit with a downside bias that worked out great). We thought that excessive panic after the fact would not only create a washout Monday, but by midday Tuesday a turn-up. But even as we, along with a few others, thought S&P and FTSE would recover; we thought it was a short-covering (and buying by narrow-horizon players) type of frantic move that would run-into 2nd Quarter's-end 'traditional' run-ups that in fact can be driven by pension allocation readjustment, spurred on by the rest.

I point that out because the nature of the move might mean more than simply a continuation pattern that so many talk about going forward. So of course you still have 'TINA' (there is no alternative) bulls and skeptical (valuation) bears fighting about it. Lower rates for much longer will be a problem not just for banks; which is why my remark about the chutzpah of their coming forth with buybacks etc. It is a July that starts with a number of potential monkey-wrenches out there and a lack of arguments for higher levels aside the persistence of TINA yield-chasers.

In sum:

Markets generally ignored Friday developments; including Puerto Rico defaulting (after a bailout that brought out protests by those who lament Federal requirements for providing the funds); the IMF bailout of an Italian bank; or very curious statements by the Czech Republic President, asking for a referendum in this case not 'only' on remaining in the EU, but in NATO (hello; what?). Does he prefer to be again in Russia's bosom? Hardly; independent like Switzerland, or is it just a political reflection? I'll consult our studious member in Prague, but so far the Czechs were pretty smart staying out of the Eurozone, very competitive, while being a part of the EU and NATO. What it does reflect is what we've said; Brexit was more of a poignant moment for the EU perhaps, than for the UK. Of course this entire issue will percolate, with ramifications through the Summer.

In the midst of this, we had the horrific Istanbul Airport attack, prepared and in fact said to be organized by ISIS in Raqua Syria, using commando veterans out of the former Chechen zone that fought with Russia. Apparently the mastermind is said to have once received refugee status (??) in Austria, and then moved to Turkey without being monitored. ISIS followed this (they often do) with further threats, this time mentioning JFK, LAX and LHR (Heathrow) as targets. We pray the reach of their verbiage is greater than their capacity; but even experts say it is a concern. We publish this comment Saturday, knowing the sad resolution to an attack, with dozens of hostages taken, in the diplomatic section of Dhaka Bangladesh. (No US Consular staff involved; but students of US colleges were. Most of the fatalities were Indian, Japanese and Italian.)

Bottom line: There is no change in our overall ebb-and-flow pattern. We realize that chances of further upside exists 'technically', because it came all the way to a full recovery; which as I outlined, isn't surprising. In fact we wanted it to hit the Sept. S&P 2100 level ideally (ie: lower risk in a newly overbought condition); but that doesn't mean it can't (probably will) attempt to go higher, at least in the very choppy short-term. We decided to retain a little defensive 'skin-in-the-game' on the bearish side of the ledger this weekend; hence a partially retained short.